On December 19, 2016, the Canadian Minister of Innovation, Science and Economic Development issued guidelines (Guidelines) on the national security review process under the Investment Canada Act (ICA)1. The Guidelines represent the first guidance that the Canadian Government has provided on this process since it was introduced in 2009.
The ICA provides for the review of foreign investments in Canada, including acquiring control of Canadian businesses, minority investments and establishing new Canadian businesses, to determine if they are “injurious to national security”. The federal Cabinet has the authority to take any measure to protect national security, including rejecting the investment, authorizing it on terms and conditions or requiring a divestiture.
The national security review process was used only sparingly at first but has been invoked more frequently during the past few years with the Government reporting earlier this year that there had been eight national security reviews in total. Foreign investors facing these reviews (and their legal counsel) have complained about the lack of transparency, predictability and scope of the process. The new guidelines respond to that criticism by illuminating the factors the Government considers when assessing national security risks and providing some guidance on how to navigate the review process.
The list of factors that the Government will consider in assessing the national security risk of an investment relate to both the parties as well as the target business - similar to the national security review process conducted by the Committee on Foreign Investment in the US (CFIUS). Interestingly, unlike the CFIUS guidance, the Guidelines do not expressly identify foreign government ownership or control of an investor as a relevant consideration. However, the Guidelines do state that the potential influence of a “third party” may be considered.
The Guidelines note that the potential risk factors include the following:
- The potential effects of the investment on Canada's defence capabilities and interests;
- The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
- Involvement in the research, manufacture or sale of goods/technology identified in the Defence Production Act;
- The potential impact of the investment on the security of Canada’s critical infrastructure. Critical infrastructure is defined as processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government;
- The potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;
- The potential of the investment to enable foreign surveillance or espionage or to hinder current or future intelligence or law enforcement operations;
- The potential impact of the investment on Canada’s international interests, including foreign relationships;
- The potential of the investment to facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.
The Guidelines are helpful in that the Government’s concerns seem to relate largely to traditional national security issues such as defence and sensitive technology. While factors such as critical infrastructure (which likely includes telecommunications) and “the supply of critical goods and services to Canadians” could be construed quite broadly, we are not aware (based on the limited public information available) of the Government taking such an interpretation in past national security reviews. One factor that could, in a given situation, create some uncertainty for foreign investors is how the Government would assess the impact of an investment on Canada’s “international interests”.
With respect to process, the Guidelines encourage investors, particularly in cases where the factors listed in the Guidelines are present, to contact the Investment Review Division at an early stage when considering an investment in Canada and where a filing is required, to submit it at least 45 days prior to the planned closing of a transaction. This has the effect of triggering the time periods within which the Government must provide notice of a review or possible review on national security grounds. (This option is not available where the foreign investment is not subject to a filing requirement, e.g., in the case of a non-controlling minority investment.)
The Guidelines also stress the confidentiality of the national security review process and in particular, note that national security considerations may restrict the information which the Government discloses to the investor and others. From the investor’s perspective, the downside of this approach is that the investor may be unaware of the grounds for the Government’s concerns and may therefore be unable to counter the validity of those concerns.
With the release of the Guidelines, the Government also announced plans to introduce amendments to the ICA that would require the Government to issue annual reports on the administration of the national security provisions. This is a welcome enhancement to the transparency associated with the ICA’s national security screening process.
Finally as discussed in our article Back to the drawing board: Canadian Government divestiture order in national security case set aside and new review to take place2, the Government reiterated that it will increase the threshold that triggers a review of investments under the “net benefit to Canada” test. The threshold will be raised to rise to C$1 billion in enterprise value in 2017 from the current amount of C$600 million.